Booming Luxury Car Market Boosts Lear's Revenue Per Vehicle

Lear Corporation is a leading manufacturer and distributor of automotive interiors to some of the largest automakers around the world. Performance of LearLear’s clients in the automobile industry, which is driven by global vehicle demand, directly impacts the company’s business. GM, Ford and BMW are the biggest customers of Lear, representing 54% of the company’s sales last year.Higher demand for these automakers is thus crucial for Lear, which is in turn dependent on current trends in the automotive market. One such trend that has boosted the company’s top line is the growing market of luxury and full-size cars. Higher priced premium vehicles, which offer more features and functionality, require larger amounts of seating and electrical content. Higher sales of these vehicles has improved Lear’s seating and electrical revenue per vehicle.

Lear’s business has been divided into two segments: the seating segment and the electrical power management system segment. While the seating division offers complete automotive seating systems including individual component parts, the EPMS division includes wire harness, terminals and connectors, junction boxes and wireless remote control devices installed in a vehicle.

BMW remained at the top in the global luxury vehicle market in 2013 with 1.66 million unit sales, up 7.5% year-on-year. The automaker gained from strong demand for luxury vehicles in the U.S. and China, and contributed 10% to Lear’s top line last year. Although losing its crown to Mercedes-BenzMercedes-Benz in the U.S. premium segment, BMW posted record sales of over 309,000 units in the country, representing a 10% growth over 2012 levels. In January as well, sales of BMW’s passenger cars have grown by an impressive 24% over 2013, bolstered by strong sales of the flagship 3-series sedan. After suffering a dip through 2011-2012, the proportion of luxury vehicles in the overall U.S. auto industry rose to over 11% last year, showing promising signs of growth going forward.

In addition to BMW, Lear supplies electrical content to the Chevrolet Volt and Cadillac ELR extended range electric vehicles sold by GM. Chevy Volt was the best selling hybrid electric vehicle in the U.S. last year with over 23,000 unit sales. However, the newly launched Cadillac ELR hasn’t met the same enthusiasm from consumers. High price and stiff competition from the Tesla Model S are reasons why Cadillac’s unit sales were only in double digits in January. But as the Cadillac ELR is only a couple of months old, GM and in turn Lear will hope that sales of the model gain traction in the coming months. Chevy Volt also faces a strong challenge from the plug-in hybrid Nissan Leaf, which grew by a whopping 130% in unit sales last year, while sales of the Volt remained flat. However, GM has provided discounts on the Volt, and announced numerous technological additions in its 2015 model in order to spur its demand.

Growth Of Luxury Vehicles Is Maximum In China

China beat the U.S. to become BMW’s largest car market in 2013, accounting for nearly 400,000 unit sales. This represented growth of 20% for the automaker over 2012 in China, bolstered by a rising proportion of high income groups in the country. According to McKinsey & Co, China’s luxury car market will grow at a CAGR of 12% through 2020, surpassing the U.S. as the world’s largest premium car market as early as 2016. Lear has also benefited from the conducive market conditions in China, generating $1.8 billion from the country last year, up 35% from 2011.

BMW now plans to launch more than ten models in China this year, including the i3, to provide further impetus to its sales numbers. The BMW i3, a 5-door sedan urban electric car, has a waiting list of up to six months and is already a success in Europe, selling 11,000 units since its launch late last year. With rising demand of luxury vehicles and increasing sales of BMW in China, Lear is well placed to derive meaningful top line growth from the premium car segment in the region.

Luxury Cars Improve Content Per Vehicle For Lear

Growth of premium vehicles bodes well for both the seating and electrical divisions of Lear, as these vehicles require higher content volumes. Luxury and full-size cars have more electronically controlled features as compared to mid or small sized cars, resulting in higher electrical content per unit for Lear. This is why growth in the premium vehicle market contributed to record sales in Lear’s EPMS segment last year. Revenues in this segment grew by 19% to over $4.2 billion for the company, with electrical content per vehicle increasing by 23% by our estimates. Potential growth of the luxury car market and Lear’s clients could further propel this figure in the coming years. We currently expect the company’s electrical content per vehicle to rise by 3% in 2014. The figure increased by a whopping 47% in the last couple of years, rebounding after weak economic conditions hampered demand for luxury vehicles in previous years. If the electric content per vehicle continues to follow recent trends and rises by 10% this year, there could a 3% upside to our price estimate for Lear.

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